Fed role in loan rates

The Federal Reserve’s influence on auto loan rates is several steps removed from the nitty-gritty of the F&I department.

The Fed controls only the federal funds rate and the discount rate. The federal funds rate is the rate at which banks lend each other funds overnight to meet cash reserve requirements. The discount rate is the rate the Fed charges on loans it makes to member banks.

As the cost of borrowing falls, those lower rates filter down to the level of consumer credit.

In its latest rate cut on Oct. 2, the Fed cut the federal funds rate by half a point, or 50 basis points, to 2.5 percent. It was 6.5 percent on Jan. 1, 2001. The Fed, in its latest move, also cut the discount rate 50 basis points to 2 percent.

The Fed had just cut those rates by 50 basis points on Sept. 17.

“The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped,” said the Fed’s Open Market Committee in an Oct. 2 statement.

Other interest rates, such as the prime rate, tend to mimic movements in the short-term rates set by the Fed, but they do not move in lockstep.

“All the other interest rates — for mortgages, vehicles, credit cards — are subject to market pressures,” said Charles Ballard, professor of economics at Michigan State University.

“They are determined by the interactions of the lenders and the borrowers. The Fed has only indirect control over these rates.”

You can reach Jim Henry at autonews@crain.com

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